Learn about the legal complexities and risks associated with sales tax in M&A transactions involving retail liquor businesses. Understand the importance of proper tax reporting during transitional arrangements.
July 8, 2020
Introduction:
When selling a business that involves a liquor license, several steps must be taken for the buyer to legally take over the license. This involves state and possibly local approvals. Sometimes, buyers and sellers opt for a transitional setup where the buyer temporarily manages the business and sells liquor under the seller’s license. This includes responsibilities like collecting and remitting sales tax to the state. However, issues can arise if the buyer miscalculates or underreports the sales tax during this transition period.
The Situation:
In a specific case, the owner of a corporation operating a retail liquor business attempted to sell the business to three different buyers. Each buyer took control of the business under a management agreement until obtaining the liquor permit. During this time, they collected sales tax, filed tax returns, and paid the sales tax to the state of Ohio. The management agreements explicitly made the potential buyers responsible for all sales tax obligations during their terms. Additionally, the seller audited the buyer’s tax compliance. Despite these efforts, none of the deals were finalized, and the seller continued operating the business.
The Legal Dispute:
Unfortunately, the buyers inaccurately reported their sales tax, leading the state of Ohio to hold the business owner accountable for nearly $100,000 in unpaid sales tax. The owner contested the tax assessment at the Ohio Board of Tax Appeals and the Ohio Court of Appeals but was unsuccessful in overturning the decision.
Insights:
It might be tempting for sellers to pass the reins of their retail business to the buyer before obtaining all necessary governmental approvals through a transitional arrangement, such as a management agreement. However, there’s a tax risk involved, namely the potential exposure of the seller to underreported sales tax liabilities.
To mitigate this risk, the business owner would be wiser to delay the business handover until after the liquor license has been secured. Alternatively, the owner could seek to protect themselves by requesting an adequate cash deposit from the buyer to cover any potential tax liabilities.
This case is referred to as Painter v. Testa, No. 16 CAH 03 0016, Court of Appeals of Ohio, (January 20, 2017).
By John McCauley: I help manage the tax risks associated with buying or selling a business.
Email: jmccauley@mk-law.com
Profile: http://www.martindale.com/John-B-McCauley/176725-lawyer.htm
Telephone: 714 273-6291
Check out my book: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles
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